Indian power sector at the crossroads

Breaking the Impasse

Date : May 7, 2012

Key Messages
Share of energy expenses in Indian household expenses declined for the first time in two decades
In the five years ended FY10, power tariffs grew at under 5% p.a. ; per capita income at 13.4% p.a., household expenditure at 10.6% p.a.

Costlier imports now account for 15% of coal-based power generation

Sluggish growth in local coal production takes imports share in power to 15% in FY12 (7% in FY07). Imported coal priced at 1.6 times Indian coal on an equal energy basis.

As tariff growth lags fuel prices and other costs, utility finances worsen
Revenue gap per unit of power grows at 33% p.a. in the 5 years to FY10. Accumulated losses at utilities estimated to have crossed Rs.2 trillion by end FY12 Had power tariffs growth in line with household expenses, the Rs,88,000 cr. loss at utilities in the 5 years to FY10 would have turned to a profit of Rs.8,000 cr.

Indian power tariffs are lower than other countries ; vary across states. Though tariffs have risen in FY11 & FY12, further hikes needed

The consumer can pay, the system must tap into it to restore sector viability
Regular cost-linked tariff growth, higher domestic coal production are key

Share of energy expenses in Indian households falls

Expenditure on light & fuel as% of total expenditure
12% 10.20% 10% 8% 6% 4% 9.50% 9.90%
Copyright 2011 by CRISIL Ltd. All rights reserved.

7.50%

7.40%

7.80% 7.50%

8.00% 6.80%

6.60%

2%
0% 1987- 88 1993-94 1999-2000 Rural households Source: National Sample Survey Office (NSSO) Urban households 2004-05 2009-10

In the five years ended FY2010, the share of energy expenses in Indian household expenses declined for the first time in two decades The dip is sharper for urban households where a greater share of energy consumption is in the form of electricity or petroleum products

 as power tariffs grow less than other expenditure items

Growth in power tariffs vs. income and expenses
16% 14% 12% 10% 8% 6% 6% 4% 2% 0% 2005-06 2006-07 2007-08 2008-09 2009-10 4% WPI : CAGR: 6.5% Per Capita Household Exp CAGR: 10.6% Per Capita Household Income CAGR: 13.4% 14% 12% 10% 8% CPI IW CAGR: 9.1%

Domestic Tariff CAGR: 3%

2% 0%

Domestic Tariff CAGR: 3%

2005-06 2006-07 2007-08 2008-09 2009-10

Per capita income grew at 13.4% p.a. and household expenditure grew at 10.6% p.a., retail power tariffs grew at only at ~3% p.a.
Power tariffs have lagged inflation - both WPI and CPI - industrial workers

Copyright 2011 by CRISIL Ltd. All rights reserved.

Growing reliance on imported coal

Domestic coal production virtually stagnant over the last 4 years
Over the last 12 years, domestic coal usage for power generation grew by 6% p.a. by volume v/s 24% p.a. for imports Over the last 2 years, imports met a majority of the coal consumption growth by the power sector The volume share of imported coal usage for power generation doubled to 15% The energy share of imported coal usage for power generation stands higher at 18%
500 400 300 235 243 251 265 200 100
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304 312

Stagnation in domestic production 440 442 397 419 362 336

8 0

11

19

21

27

28

30

46

80

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Domestic Coal (MT) : CAGR: 6% Imported Coal (MT) : CAGR: 24%

Source: Ministry of Coal

100%

95%

80% 60% 50% 40% 20% 19% 21% 43%

15% 13% 6% 6% 7% 6% 7% 9% 3% 2% 3% 2% 9% 4% 7% 0% 0% 0% 0% 200120022003200420052006200720082009201020112012 Share of Imported Coal in total coal consumption Share of imported coal in Incremental coal consumption

Source: CRIS Analysis

Imports are costlier and their prices are more volatile

600 500 400 300 200
Copyright 2011 by CRISIL Ltd. All rights reserved.

100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Indexed Domestic Coal - CIL Price - CAGR 6% Indexed Imported Coal Price - Australia - CAGR 12% Source: Domestic Coal - Coal India, ROM Prices (F Grade) Imported Coal - Coal spot.com, FOB prices (F Grade) Indexed Cost for Coal Block - CAGR 6%

While domestic coal price growth has been slow and steady import prices have been both faster growing and more volatile. In last 12 years
Domestic coal prices grew at 6% p.a Imported Coal prices grew at a higher 12% p.a. and were more volatile

Average price of gas used for power production grew at 9% p.a.

Low tariff hikes + fuel price growth = high utility losses

Utility finances
700 600 500 400 300 201 200 100 0 16 112 73 2005-06 267 319 537 132 157
Copyright 2011 by CRISIL Ltd. All rights reserved.

635 149

191 29

8 129
131 2006-07

165 248 125 2007-08 2008-09 2009-10 295

Subsidy unpaid (CAGR : 75%) Total book loss all utilities without subsidy (CAGR : 42%) Subsidy Received (CAGR : 14%) Total book profit / (loss) - all utilities - without subsidy (CAGR : 42%)

The aggregate annual loss at utilities before subsidy has increased at 33% p.a. Though subsidies booked have grown at 30% p.a., subsidies received only at 14% p.a.

Accumulated losses estimated at over Rs.2 trillion as at end FY12, Rs.1.23 trillion as at end FY10

Had tariff risen in line with household expenses

FY 2009-10 tariff (on input side)
Gap 0.38 0.27 Subsidy : Rs/kWh

Average cost of supply Rs 3.54 /kWh

Tariff higher by 22% 2.68

3.27

Tariff from consumers

If power tariffs had increased in line with other household expenses over the five years ended FY 2010, i.e.at 10.6% p.a.

Total revenue gap in FY10 would have stood at 8% of tariff (actual level was 32% )
Revenues would have been higher by Rs.95,000 Cr. and utilities would have recorded a profit of about Rs.7,700 Cr. instead of a loss of Rs.87,269 Cr.

Copyright 2011 by CRISIL Ltd. All rights reserved.

0.48

Many states have raised tariffs in FY11, but the gap remains
Year-wise states tariff revision
No of States
20 15 10

Tariff increase in 2010-11 Tariff Increase % States

17 14

<5% 5-10% >10% - 15% >15%-20%

Gujarat HP,MP, Punjab, Karnataka

Copyright 2011 by CRISIL Ltd. All rights reserved.

5
5

3 1 1 2006 2008 2009 2010 2011

Mizoram, Manipur, Chhattisgarh, Maharashtra

AP, Orissa, Bihar, Jharkhand, J&K Nagaland, Delhi, Rajasthan

2005

Tariff change during the year

>20%

While actual data for FY 2010-11 is not available

Average tariff growth is likely to rest in the 10-15% range Costs likely to have grown at rates similar to the past i.e. at around 9% Though the average revenue gap will decline over FY 10, it will remain significant

Can tariffs rise? Tariffs lower than other countries

Retail tariff (US cents/kWh)
30 25 20 15 10 5 0 8 5 10 11 7 8 6 7 16 16 24 18 15 14 12 10 5 0 South Africa Indonesia India Malaisya Germany France 4 5 18 15 17 10 10 11 10 8 9
Copyright 2011 by CRISIL Ltd. All rights reserved.

Cost vs. average billing rate

20 15 13 12 7 14

South Africa

India

Indonesia

Malaisya

Domestic/Residential

Average billing rate

Germany

France

Brazil

UK

US

cost of service (US c / kWh)

Average Billing rate ( US c /kWh)

Indian retail tariffs are lower than those in developed countries by 8-10 cents/unit and those in developing countries by 2-4 cents/unit
Domestic tariffs are higher than industrial tariffs in developed countries while the reverse is true in developing countries Domestic tariff in India is 10-15% lower than even Indonesia

Realised tariff as a percentage of cost is 74% in India as compared to 115-120% in developed countries and 80-90% in other developing countries
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Power procurement cost rising - Fuel cost to account for over 50% of cost increase
Average cost of power procurement (Rs./kWhr)
6.00 5.0 5.00 4.00 3.00 2.8 3.1 3.3 3.8 4.0
Copyright 2011 by CRISIL Ltd. All rights reserved.

5.3

4.4 3.3

4.7

3.5

2.00
1.00 0.00

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

CRIS Projections Source: CRIS Analysis

Fuel costs accounted for about 48% of the total power purchase cost growth for utilities over the last six years. Over the next five years, CRISIL Infrastructure advisory estimates that fuel costs will account for about 54% of the total power purchase cost growth for utilities. On account of the cost increases, the tariff would be required to increase at CAGR of 6% over the next 5 years.

11

Can tariffs rise? WB pays two times as much as TN !

Tariff comparison for domestic <100 kWh/month
Tariff range
Rs 1 to 1.49/kWh
Rs 1.5 to 1.99/kWh Rs 2 to 2.49/kWh Rs 2.5 to 2.99/kWh Rs 3 to 3.49/kWh Rs 3.5 to 3.99/kWh Rs 4 to 4.49/kWh

Tariff comparison for agriculture 2 HP <400 kWh/month

Tariff range
Upto 0.49/kWh Rs 0.5 to 0.99/kWh

State
Bihar-R, Jharkhand -R, UP-R, HP, J&K, Odisha Chhattisgarh, Kerala, TN Jharkhand-U AP Bihar U Gujarat U&R, Karnataka, Meghalaya, Uttarakhand, Assam, Haryana, Maharashtra, Punjab, WB U & R Rural category of Rajasthan, MP U & R Urban category Rajasthan, UP

State
AP, Haryana, J&K, Karnataka, Punjab, TN
Copyright 2011 by CRISIL Ltd. All rights reserved.

Rural category of Bihar Jharkhand, Kerala Urban category of Bihar Chhattisgarh, Meghalaya, Odisha, Rajasthan, Uttarakhand Gujarat, Maharashtra, Rural category of UP HP, MP, WB Urban category of UP Assam

Rs 1 to 1.49/kWh

Rs 1.5 to 1.99/kWh Rs 2 to 2.49/kWh Rs 2.5 to 3.0/kWh

Consumers in some states paying much more than others WB v/s TN

Tariff growth not held back by consumer ability to pay but by the inability of the system to tap this paying capacity Timely and regular revision important for systemic sustainability is feasible
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Way forward : as per CRISIL Infrastructure Advisory

Improve utility finances
Regular Tariff growth to offset fuel cost increase : Effect automatic tariff increases for an approved fuel mix, without a petition - use an independent index such as that published by the CERC Gameplan for improving distribution efficiencies: Publish circle-wise technical and commercial losses alongwith improvement targets for weak circles Timely payment of subsidies and regulatory assets: Fund subsidies and regulatory assets in the books of the state government - through an escrow mechanism administered by the RBI, if needed. This will optimise cost of funds and free the utilities to undertake capex for efficiency improvement.
Copyright 2011 by CRISIL Ltd. All rights reserved.

Incentivise through financial concessions Lengthen maturities of utility loans from banks and FIs Give interest rate concessions on utility from banks and FIs

Better harness domestic coal reserves

Coal block linked award of power projects, with rigorous performance penalties for faster development Incentivise timely production from captive coal blocks de-allocate wherever needed

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